Question
1. You were appointed, on 1 October 2021, as a financial adviser to the owner of a small face mask manufacturer. The business currently makes
1. You were appointed, on 1 October 2021, as a financial adviser to the owner of a small face mask manufacturer. The business currently makes a net profit of 20,000 per annum, which is projected to continue for the foreseeable future. Your client has a long-term relationship with his local bank and has access to a business account that earns 2% per annum on any deposits, and a rolling loan agreement that charges 4% per annum on any borrowings. In previous years the owner simply invested any profits in the deposit account which has grown to 150,000.
Your client has decided that the companys profits ought to be put to better use and has brought to you the following opportunities to advise on: Temporarily diversify the business into the manufacture of hand sanitiser. The venture requires a single initial investment of 100,000 for new machinery and materials. The net annual income from this project is expected to be zero for the first 3 years before making an annual profit of 10,000 at the end of the fourth year, increased by 1000 per annum for the subsequent 11 years. After this 15 years the machinery will be obsolete and have an estimated scrap value of 5,000. New employees with specialist skills would be required from the outset and the salary cost of these has been factored into the data given.
1. You were appointed, on 1 October 2021, as a financial adviser to the owner of a small face mask manufacturer. The business currently makes a net profit of 20,000 per annum, which is projected to continue for the foreseeable future. Your client has a long-term relationship with his local bank and has access to a business account that earns 2% per annum on any deposits, and a rolling loan agreement that charges 4% per annum on any borrowings. In previous years the owner simply invested any profits in the deposit account which has grown to 150,000.
Your client has decided that the companys profits ought to be put to better use and has brought to you the following opportunities to advise on: Temporarily diversify the business into the manufacture of hand sanitiser. The venture requires a single initial investment of 100,000 for new machinery and materials. The net annual income from this project is expected to be zero for the first 3 years before making an annual profit of 10,000 at the end of the fourth year, increased by 1000 per annum for the subsequent 11 years. After this 15 years the machinery will be obsolete and have an estimated scrap value of 5,000. New employees with specialist skills would be required from the outset and the salary cost of these has been factored into the data given.
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